LETS BANK INDIA & our TWO Favourites.

A few days back it was in David Rubenstein's Peer to Peer Conversation Show, Mr.Uday Kotak was the guest. Mr.Kotak mentioned the shift happening from Public Sector Banking to Private Sector Banking in India. Presently it's 65%- PSU Banks & 35% - Private Banks, he predicts it moving to 50%-50% in the next 10 years. And that's a big opportunity for Private Banks in India.

 While the TOP 3 Private Banks of India - HDFC Bank, ICICI Bank & Kotak Mahindra Bank have taken the lead and have been growing leaps & bounds. But from a stock perspective, the market has already priced in this growth & the stocks have been doing pretty well.

India today is seeing a massive shift in "Financialization"  & one of the major contributors is the PM Jan Dhan Yojana(PMJDY), which in its 6th year has 40Cr. + beneficiaries. Why is this important? Because an important aspect is that DBTs( Direct Bank Transfer) via PM Jan Dhan accounts have ensured every rupee reaches its intended beneficiary and prevented systemic leakage, directly killing the middlemen of the yesteryears. And when the poor get cash in their hand, they spend it too & hence the consumption cycle kicks off. If you look at the macro indicators post-COVID, Rural is literally rocking, be it record Tractor sales or FMCG companies witnessing a big spike in their sales in rural India. One point to note however is, majority of these PMJDY bank accounts have been opened in PSU Banks ( as those PSU Banks were only available in their villages then), guess what - in the coming decade the naive rural customer will also switch to a private bank, demanding better services.

Add to this in the post COVID era, people's awareness of Financial assets have also gone up. Demat Accounts are opening up, Savings have grown exponentially, the list is plenty. Banks in India are all set for a decadel growth mode. Since 1994, the private banks have grown their advances at ~38% CAGR v/s. public banks growing it at ~19%.

We today, however, explore the Mid Cap Banking sector and specifically 2 Banks, in particular, which we believe can be a beneficiary of this transition, one a very new bank & the other a very old bank. Both these banks have one thing in common though - Stellar Leadership & Ethically Driven. Both the stocks are presently available at dirt-cheap valuations, and if we see the Indian Economy opening up further in the days to come, we believe these two banks are perfectly positioned to tap the growth that we might see happening in the future.


IDFC First Bank :

Yesterday IDFC First Bank released their Q2 FY21 Results. The profit after tax for the half-year ended September 30, 2020, is reported at Rs 195 crore.  The bank has now reported three consecutive quarters of profitability, IDFC First Bank said in a release. This is important because finally it looks like all the bad blood is finally out & the era of Profitability for this uber new bank is here.

For the uninitiated, IDFC First Bank was created only in December 2018, after the merger of erstwhile IDFC Bank & fast-growing NBFC- Capital First. Since then Mr. V Vaidhyanathan has taken the helms on his hand and quarter on the quarter he has shown how this is the bank of the future. This HARVARD alumnus has earlier done similar things for ICICI too ( he was the Head of RETAIL Banking &having spent  almost a decade there, he understands what it takes to build a world-class bank)

I am reminded of the Maruti Suzuki Advt. - "Kitna Deti Hai", WHY? because in this Post COVID era, where most of the Banks have reduced their interest rates on FD, here is a bank that is paying 7% interest, no wonder we see a lot of people switching to this Bank.

Warburg Pincus one of the biggest P/E Investors globally is betting big on this bank, we are sure they see a big opportunity in this bank post their due diligence. In its second investment, it injected Rs 200 crore ($26.4 million) into IDFC First Bank in MAY 2020 to maintain its near-10% stake in the private-sector lender.

At Rs.30/share the stock is still available at a Price/Book Value of just 1.07! We believe once it matures it will attract better valuations, if not similar to the BIG 3. Presently HDFC Bank's P/B Ratio is 3.82 & for Kotak Mahindra Bank it's 5.47.

Lastly, will recommend, you personally visit one of the branches of IDFC First Bank close to your home, you will be pleasantly surprised with the overall vibe of the branch - not just the bright interiors but the welcoming employees too.

Federal Bank :

It's one of the oldest banks of India but now runs like a new age bank. One of the early adopters of Blockchain technology & continues to be the leader when it comes to Remittances from Gulf nations.
Yes, it's a behemoth in KERALA, however, if the last few years are to be seen as an indicator, its aspiration for becoming a national level bank is taking shape silently.

Mr. Shyam Srinivasan, the IIM Calcutta & London Business School alumnus is the story here.  A leader who commands respect & is known for his Values across the industry. He has also created a team of stellar leaders under him, who will be all set to take reigns in the years to come. Our favorite is Shalini Warrier, the present COO.

They say, judge a leader on how he/she handles a crisis. Sharing an excerpt from the Q4 Investor Call of FY2018, where the big Bull - Rakesh Jhunjhunwala questioned Shyam Srinivasan on higher provisions that quarter. And yes RJ Sir is an Investor in this Bank.

RJ: “I have no idea…our bank has some or the other problem every quarter. Sometimes there are education loans, now it is RBI circular. Anyways, God bless!” he ended his query session.

Srinivasan was quick to add, “We are a real business Rakesh.” 

Here is someone, who didn't give an excuse of why the bank didn't do well that quarter but answered in all his composure & confidence. Fast forward 2 years from that call, Federal Bank over the last two quarters have shown stellar results. RJ Sir is still an investor of the Federal Bank. The stock price hasn't moved up surprisingly, so here lies the opportunity we believe.

At Rs.50/share the stock is still available at a Price/Book Value of just 0.69! We strongly believe it will soon get re-rated if the  Covid related Provisions don't spike up. Good Luck Shyam Sir.

Disclaimer: The vision of 'Mad About Stocks' is to make people understand that Investing is Simple but not Easy. Stocks as an asset class is all set for decades of strastropheic upswing in India. And if one understands some basic principles, they can achieve immense success. The content we post is purely for educational purposes and NOT to be treated as a Stock Recommendation. We are NOT a SEBI registered Financial Advisor and hence do not provide any Investment or Financial Advisory services.